By Guan Wang
Bruce Berkowitz's Fairholme Fund is one of the best mutual funds in the world. It returned an average of 12.9% a year from 2000 to 2009, before going on to return 25.5% in 2010. Thanks to Berkowitz's strong performance during that period, Morningstar named him "Stock Manager of the Decade."
Berkowitz mainly invests in financial stocks. Over 75% of his portfolio is invested in the financial sector. He has large stakes in American International Group (AIG), Bank of America (BAC), and Citigroup (C), among others. Thanks to the European debt crisis, these positions lost nearly 50% over the past year. As a result, Berkowitz did not perform well in 2011, losing over 32%.
We have been saying that the market is overly bearish about the soft economy in Europe and that some financial stocks are good investments for the long term. In fact, with the recovery of the market this year, AIG, BAC, and Citigroup all generated decent returns. If Berkowitz's 13F portfolio did not change in the first quarter, it will have returned 33% so far this year, vs. 12% for the S&P 500 index during the same period. Here are Berkowitz's stock holdings at the end of December:
Table: Berkowitz's 13F portfolio as of Dec. 31, 2011
Company Name | Ticker | Value (*1000) | YTD Return |
AMERICAN INTERNATIONAL GROUP INC | AIG | 2135434 | 41.77% |
C I T GROUP INC NEW | 649163 | 17.09% | |
BANK OF AMERICA CORP | BAC | 579696 | 66.31% |
M B I A INC | 539297 | -18.21% | |
SEARS HOLDINGS CORP | 511928 | 95.69% | |
BERKSHIRE HATHAWAY INC DEL | BRK-A | 461545 | 5.70% |
LEUCADIA NATIONAL CORP | 415654 | 9.37% | |
ST JOE CO | 372348 | 20.87% | |
BERKSHIRE HATHAWAY INC DEL | BRK-B | 208310 | 6.04% |
AMERICAN INTERNATIONAL GROUP INC | AIG | 135154 | 41.77% |
CITIGROUP INC | C | 55517 | 32.28% |
JEFFERIES GROUP INC NEW | 17604 | 33.85% | |
BANK OF AMERICA CORP | BAC | 17151 | 66.31% |
WELLS FARGO & CO NEW | 7022 | 22.88% | |
JPMORGAN CHASE & CO | 4120 | 35.18% | |
GOLDMAN SACHS GROUP INC | 1926 | 30.88% | |
WELLS FARGO & CO NEW | WFC | 865 | 22.88% |
ASSURED GUARANTY LTD | 679 | 18.06% | |
REGIONS FINANCIAL CORP NEW | 90 | 49.88% |
Bank of America is the best-performing financial stock in Berkowitz's portfolio. The stock lost about 58% during 2011, but it recovered most of its losses over the first quarter this year. It returned 66.31% since the beginning of this year, beating the market by over 54 percentage points.
Of the 350-plus hedge fund managers we track, Berkowitz is the most bullish about Bank of America. He had nearly $600 million invested in this stock at the end of the fourth quarter. Bank of America was also popular with many of the other hedge funds we track. As of Dec. 31, 2011, there were 85 hedge funds with Bank of America positions, up from 75 at the end of September. Besides Berkowitz, Ken Heebner, Eric Mindich, and John Paulson were also bullish about Bank of America (see John Paulson's top stock picks).
We like Bank of America. As we mentioned earlier, we think the market is over concerned about the negative impact of the European debt crisis on certain financial companies, and we think Bank of America is one of those companies. The company is trading at very attractive valuation levels, even though it has already gained over 60% this year. It is currently priced at $8.97 a share. Analysts expect the company to earn $0.68 per share in 2012 and $1.07 per share in 2013. Over the longer term, its earnings are expected to grow at about 8% annually. We think these estimations are conservative, but even with such pessimistic expectations, Bank of America has a low 2013 P/E ratio of 8.38.
The main competitors of Bank of America include Citigroup, JPMorgan Chase , and Wells Fargo. Berkowitz is also in favor of these three stocks. Since the beginning of 2012, all three stocks have generated better-than-market returns. They returned 31.5% on a weighted average basis, outperforming the market by around 20 percentage points. Berkowitz had relatively small amount invested in JPMorgan Chase and Wells Fargo compared with Citigroup, in which he invested $56 million in.
Citigroup is also the most popular financial stock amongst the hedge funds we track. As of Dec. 31, 2011, there were 92 hedge funds that had Citigroup in their 13F portfolios, up from 87 hedge funds at the end of the third quarter last year. Bill Ackman was the most bullish about Citigroup. His Pershing Square had $687 million invested in Citigroup at the end of the fourth quarter. Lee Ainslie, Ken Heebner, and Eric Mindich were also bullish about the company.
Similar to Bank of America, Citigroup also suffered big losses over the past year, and, like Bank of America, it also recovered this year. It was down 45% in 2011 and returned 32% so far since the beginning of 2012. We expect the stock to continue its growth in the future. Citigroup's valuation level is even more appealing than that of Bank of America. It is expected to make $4.04 per share this year and $4.68 per share next year, making its P/E ratio for 2013 7.23, vs. 8.38 for Bank of America. The number is also lower than that for JPMorgan Chase and Wells Fargo, whose 2013 P/E ratios are 7.83 and 9.15, respectively. In the long term, Citigroup is expected to grow at 8.25% per year.
Berkowitz's bets on AIG, CIT Group , Sears Holdings, and The St. Joe Co. also outperformed the market since the beginning of this year. However, these stocks do not look very attractive to us. Both Sears and St. Joe are risky investments. Neither company is expected to make positive earnings in the next few years. CIT's earnings are also disappointing. The company is expected to make $0.77 per share this year, which means that its forward P/E ratio is above 50. Though its earnings per share in 2013 is expected to be $2.79, its 2013 P/E ratio of 14.6 is still above the industry average. We do not like AIG either. The company has a very high beta of 3.45, indicating that it is much more volatile than the market.
Disclosure: I am long C.
